Abstract:Leading frictionless consumption-based asset pricing models (Long run risks and Habit formation) predict that the expected return on assets whose cash flows appear in the distant future are higher than or equal to the expected returns on assets which pay-off in the near future. Contrary to that prediction, some recent empirical studies have found that short-term assets earn a higher expected return than long-term assets. Here, I show that allowing the cash flows to be negatively affected by volatility shocks, as observed in the data (“leverage effect”), could make the short-term assets riskier than long-term assets. This modification gives more flexibility to those models in capturing various shapes of the term structure of equity returns while still matching the observed level of the equity premium and the risk free rate.